Articles of Interest

Big Pharma's Hidden Business Model and How Your Company Funds It

Business executives may not know it, but they are wasting billions of their gross profits on ineffective, even harmful drugs in their health plans. That’s one implication of the study Joel Lexchin and I just published in the BMJ (formerly British Medical Journal).

The study assembles considerable evidence about the hidden business model of major pharmaceutical companies: to devote most of their research budget to developing hundreds of drugs that provide few if any advantages over existing drugs and then market them heavily to doctors and patients. As a result, about 80 percent of increased expenditures for drugs goes to paying for these minor variations.

Even worse, testing for harmful side effects is minimal when new drugs are approved by the FDA as “safe.” And only 10-15 percent are clinically superior, according to independent review bodies. So employers and employees end up paying for treating the side effects as well as overpaying for new drugs with few advantages to offset risks of harms. The chances that a newly approved drug will get a severe, black box warning or be withdrawn for serious side effects is about 20 percent over its lifetime.

Drug companies also develop clinically superior new drugs, which enlarge the medicine chest of effective drugs that greatly benefit millions of people. But while they are waiting for the next big breakthrough, companies have to fill their product line with clinically similar drugs to market as “better” than their competitors’ similar drugs. Even new molecules are usually not clinically superior. Equating “innovative” with new molecules misses the point: to develop clinically superior new medicines.

The apparent business model of Big Pharma emphasizes the billions spent at great risk to find “innovative” and “breakthrough” new molecules that must be priced high to recover research costs that have become “unsustainable.” However, revenues have increased six times more than their increased costs for research—hardly “unsustainable.” This handsome return comes from the hidden business model that generates billions in costs for employers and employees.

The FDA approves new drugs as “safe” and “effective” with little evidence that they are either in regular medical practice. In fact, industry-friendly regulations prohibit the FDA from using comparative effectiveness to approve new drugs. That would be un-American because it would jeopardize “innovation” and high-tech research jobs. Of course, the opposite is true: requiring new drugs to be clinically superior would foster true innovation and stop rewarding pseudo-innovation.

Since companies test their own products—an obvious conflict of interest—they naturally design clinical trials to maximize evidence that they are beneficial and minimize evidence they are harmful. For example, they randomly sample from a pool that excludes people most likely to have adverse reactions, like patients with two or more health problems, women, children, and minorities. Many trials run for only a few months, long enough to gather evidence of a drug’s main effects but too short to pick up evidence of many harmful reactions.

Then drug companies retain teams of science writers and editors to shape the published medical literature in order to persuade doctors that new drugs are more effective and safer than they are. Systematic reviews find that sponsored scientific articles almost always conclude the company’s drug is better. Negative results are usually not published at all. Employees and their physicians thus get biased information about biased trials. At Harvard’s Edmond J. Safra Center for Ethics, some fellows study how these institutional practices corrupt medical science and clinical practice.

The bottom line is that prescription drugs have become the 4th leading cause of death and a leading cause of hospitalizations, accidents, and falls. See “The Risks of Prescription Drugs” (Columbia 2010). These cost employers even more in hidden ways. Most of the estimated 50 million adverse side effects suffered by Americans each year are minor: nausea, headaches, muscle and joint pain, itchiness and rashes, dizziness, depression, and feeling tired. But these decrease productivity and compromise good judgment on the job and off.

Driving all this are employers paying top dollar for new drugs that are little or no better than much cheaper, well-established drugs. Employers hold the key to sending clear market signals to Big Pharma—pay no more than generics for no better clinical value, a bit more for a bit more value, and only a lot more for significantly more value. The point is not to cut prices but to price to reward better patient outcomes.

It’s so obvious, and employers think they are managing drug costs through their pharmacy benefit managers (PBMs) and insurers. But PBMs and insurers profit from costs increasing, even as they talk a good game of holding down costs. And they do not draw on international review bodies to inform employers about the many new drugs with little added value.

No PBM (a uniquely American middleman who takes his cut) is doing what the Germans are doing for their employers—assessing the marginal gain of new drugs and paying only for greater value. The European trade association for pharmaceutical companies cries foul: how dare the new German agency for better value compare new patented drugs with older generics! But why not? Isn’t the point to see if the new ones are better than the old ones in the same class that cost a fraction as much?—How dare the new Germany agency undermine innovative research! But paying more only for better products is good business practice and rewards true innovation instead of pseudo-innovation.

Senator Bernie Sanders of Vermont has another proposal: reward research teams or companies with a large sum directly and quickly if they develop superior drugs for unmet needs and buy out the IP rights so that all drugs can be available at low generic prices from the start. It speeds up the innovation cycle (which otherwise has to wait for sales at patent-protected high prices), and it keeps health care costs down. Lower costs, more true innovation.

Donald W. Light is a resident fellow at the Edmond J. Safra Center for Ethics, Harvard University, and professor of comparative health care at the University of Medicine and Dentistry of New Jersey.